JC Flowers, the US private equity firm controlled by former Goldman Sachs banker Christopher Flowers, found itself in a difficult position this summer as NIBC, one of its largest holdings, started to show problems in its sub-prime exposures. Within a month the problem reached a head and 10 days ago, NIBCâs debt became uninsurable as market speculation grew about the Dutch lender being in difficulty.

NIBC credit default swaps spiked as high as 2,500 basis points as the bank, a week before its second-quarter results announcement, said it had lost €137m ($187.7m) in US sub-prime market-related exposure, virtually wiping out its profits for the period.

The announcement sent shockwaves through the credit market, prompting credit rating agency Standard & Poor’s to change its outlook on NIBC from stable to negative, although the bank insisted this was unjustified. Credit traders and analysts agreed with S&P, and the liquidity in default protection on NIBC debt disappeared. According to one trader, despite CDS offers in excess of 1,000 basis points, there were no buyers.

At the same time, speculation mounted that Flowers wanted to sell NIBC to a financial group and last week the bank announced it had accepted a €3bn takeover offer from Iceland’s Kaupthing as it published interim results.

Kaupthing said it had been interested in acquiring NIBC for some time, but only undertook due diligence in the past two months. It is clear from sources close to the bid that the sub-prime problems gave the talks added impetus.

One source said: “Due diligence was begun before the announcement of the losses but it was clear the seller needed good news when it announced the results.”

As Financial News went to press, a showdown was looming over ABN Amro and Goldman Sachs’ league table credit for the deal, despite NIBC’s denial that they were involved.

NIBC denied it had used any advisers in the deal, and said neither of the banks had played any part in its takeover, which was confirmed by a banker close to the talks. However, Goldman Sachs is understood to have represented NIBC’s owners for “several weeks”, according to one banking source, and ABN Amro claimed it had been appointed as joint mergers and acquisitions adviser to the sellers after the deal was concluded.

ABN Amro and Goldman Sachs had been advising Flowers on a flotation of NIBC but Kaupthing and its adviser, Lehman Brothers, dealt directly with Ravi Sinha, head of Flowers’ European business.

ABN Amro and Goldman Sachs’ work for the listing formed the basis of NIBC’s valuation, according to one source, who said the banks felt “aggrieved” at receiving no credit for their contribution. Sources said the confusion over the advisers showed the speed at which the takeover was arranged.

NIBC’s sale leaves the Flowers consortium as the Icelandic bank’s second-largest shareholder but does not remove its exposure to the bank’s sub-prime losses, which have been transferred to a vehicle owned by its shareholders. Separating the sub-prime exposure was vital to Kaupthing’s takeover bid going ahead, according to sources. One source said: “It was important; there was no way the equity market would let it buy NIBC if it had held the sub-prime assets.”

Despite transferring the sub-prime portfolio, NIBC is not rid of its exposure to the US credit market, as it owns a €1.1bn asset-backed securities portfolio, according to analysts at research firm CreditSights. This resulted in S&P reaffirming its negative watch on the bank after the Kaupthing bid.

S&P analysts wrote: “This transfer should reduce future earnings volatility, although the bank will retain other potentially volatile US structured credit portfolios.” Kaupthing is also lending €173m to Flowers’ sub-prime vehicle to part-fund its notional €500m book but this will be invested in “super senior” tranches, according to CreditSights,

Last week, analysts expected NIBC to be valued at as little as €1.5bn but it was sold for double that amount. One source said: “We don’t know where these figures came from but they only make sense if you think the business is bust, and that is clearly not the case.”

However, an analyst said: “What Kaupthing hasn’t realized is the game is up, the credit markets have changed and it will find life much more difficult.”
Kaupthing and NIBC were unavailable for comment.